Debit Cards vs. Credit Cards: Fees and Fraud Protection

By Will Chen. Last updated 22 June 2009. 23 comments

Many financial experts suggest using debit cards instead of credit cards because in theory, you will spend less if you are only paying with money you have. 

On the other hand, many people are concerned that debit cards may generate overdraft fees and offer less legal protection against unauthorized charges.  Are these valid concerns?

Overdraft Fees

According to Consumer’s Union "a person using a debit card more than 20 times a year pays an average of $223 in bounced check fees. The one who doesn’t use a debit card at all pays an average of $40."

You can avoid these fees with some thoughtful planning. Here are some great tips from Bankrate.com:

Most banks provide "convenience" overdraft protection -- which is basically a high-interest loan to cover the shortfall in the account -- a consumer who's trying to manage money responsibly could get hit with a fee of around $35.

 

Be sure to note all debit transactions in your check register and sign up for overdraft protection linked to your savings account to be on the safe side.

 

Consumers should also ask their banks in what order payments are made. Ask where you can find information on nonsufficient funds. Most banks manage payments by paying the largest items first and on down to the lowest. If your biggest item overdraws your account, you'll pay an NSF fee for every subsequent check or debit.

Keep in mind the average American pays $1,200 a year in credit card interest fees.  If you minimize your overdraft fees with the basic precautions listed above, you will most likely pay less fees by using a debit card.

Protection Against Fraudulent Charges

One of the major benefits of credit cards is that they offer generous protection against unauthorized charges.  Under federal law, debit cards do not have the same level of protection as credit cards. 

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What type of credit card are you interested in?
How much do you spend per month?
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However, many debit card issuers are offering extended liability protection to make up for the legal differences.  As MSN pointed out, "in effect, check cards now have the same protections as credit cards."  I wanted to verify this for myself.  Since Visa is one of our sponsors I was able to get a very quick response back from their spokesperson:

Despite the popularity of debit cards, consumers are often confused about the security features and consumer protections debit cards offer. Many of the same features and protections provided by credit cards are also offered with debit cards. It’s important to know that Visa debit cards carry the same protections as Visa credit cards.

 

All Visa cardholders (prepaid, debit or credit) are protected by Visa’s Zero Liability policy.

 

This policy means you pay nothing if unauthorized purchases are made on either a Visa Check card or credit card when you choose to sign for your transactions. Some issuing financial institutions offer Zero Liability protections for certain PIN debit transactions as well, but the best way to ensure you are protected is to sign for your purchases. Visa’s Zero Liability policy actually surpasses protections mandated by federal law, which in most cases caps liability at either $50 (for credit) or $500 (for debit).

The Verdict

Of course, cash is almost always better than debit or credit cards.  And as Nora pointed out, there are many great reasons to use credit cards such as building up credit rating and earning reward points.  However, if overdraft fees and fraud protection were holding you back from switching to debit cards, perhaps it is time to take a second look.

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Guest's picture
Guest

You say "Zero Liability protections for certain PIN debit transactions as well, but the best way to ensure you are protected is to sign for your purchases"... so in other words if someone steals my debit card and knows and uses my PIN, I could be out of luck? So if I don't have a debit, and only use credit cards I wouldn't have to worry about this?

Debbie Dragon's picture

With your credit cards, you're almost always covered under the zero liability for fraudulent purchases so no, you wouldn't have to worry about it as much.  (It's a pain if someone gets hold of your credit card, but you should be free from having to pay for it!) 

With a debit card though, most banks don't offer the zero liability coverage.  I had to pay $20 PER TRANSACTION to stop a bunch of debit card transactions I didn't authorize from occurring because my bank doesn't have a zero liability coverage on debit cards.  Not fun!

Guest's picture

I had a debit card get lost/stolen a couple of months ago, and I nearly ran into serious problems as a result. My bank was excellent about refunding all of the money that was fraudulently spent and the fees that were charged, but in the meantime I had no money in my checking account to pay things like rent and student loans.

I was able to get money out of savings to cover the costs while I disputed the charges, but since my savings account is at a different bank than my checking account, that meant a lot of hassle. If my credit card had gotten stolen instead of my debit card, I would have been able to get the fraudulent charges taken off before the end of the statement period without having to worry about whether my automatic student loan payment was going to get deducted.

Anyway, when I requested my new debit card, I asked for a PIN-only card, without the VISA/MC part. I would rather risk opening myself up to the temptation of spending money I don't have (with a credit card) than give someone else the opportunity to spend money that I already have and need with my checking account debit card!

Will Chen's picture

Tieaday: That's a good point. Let me ask Visa and see if they can clarify this. I like the Snowmen tie!

Ms. Kyle: It sounds like you had a terrible experience. How many days did it take them to replenish the money in your checking account?

 

Julie Rains's picture

Thanks for looking into this Will. I am one of the cc holdouts and though I have a Visa check card (part of a promotion to raise money for charity), I have never used it. I thikn the federal protection you are referring to is the Fair Credit Billing Act. Back to my original topic, are there protections for Internet shopping? 

Guest's picture
Laura

I do not have any credit card debt and I pay my bills off in full at the end of every month. I have the same mentality for spending on a credit card or a debit card--if I don't have the money to pay for it, I can't have it. I still use my credit card to pay for almost everything because I get a 1% cashback bonus on everything I buy and 3% on whatever I buy within a certain spending category (groceries, for example). It's not a lot, but the money adds up over time.

Guest's picture
brista

I use my debit card almost exclusively. I find I actually buy more if I'm cash-only because then I have all these ones and fives just waiting to be spent on little dumb things -- some candy here, a bottle of pop, some gum.

With the debit card, I stop and think -- do I really have enough money for this? Because if I don't, there'll be an overdraft fee and I know I can't afford a $30 bank charge plus whatever the business I'm buying from would charge.

I'd never use a credit card instead of a debit card, though! I'm just not disciplined enough for that. Even though I know it's not "free money," credit cards sort of feel like that to me. I don't really have to worry "will this purchase make my checking account bounce?"...even though, technically, I should. So I think it's just safer for me to use debit instead of credit OR cash.

Plus, when I use my debit card, my bank keeps track of it online which then I use Thrive along with it to keep track and see exactly where my money's going (I buy a LOT of food, I've found out). With cash, it goes down the drain and then I wonder, "What'd I spend that on?" and I have no idea what I spent it on and no way to find out.

Guest's picture
brista

I was using my debit card once and I couldn't remember my PIN since I'd just changed it. I used the debit card as a "credit card" and just signed my name instead of putting my PIN in. The money comes from my checking account either way.

The cashier said, "Oh, it's better to use debit cards with the "credit card" option because when use use the "debit card" option, banks will charge you fees." Now maybe my bank is just really nice (apparently other banks charge you fees just to have a checking account??) but I've never gotten any fees for using the "debit card" option.

I've even gotten cash back a few times at drugstores (since not carrying cash makes it annoying to pay for parking sometimes!) and still didn't get charged any fees. So do some banks charge for this? Or was that cashier just passing bad information?

Guest's picture
Patrick

Most banks and merchants do not charge for pin transactions.

To others,
To limit your liability. You can lower your daily authorization limit on debit cards. I lowered mine to $1,000 so, I can still use it on weekends and holidays

Guest's picture
Dave M

If you ask me (which you didn't), it's all about strategy and discipline. First, I think debit cards are way too dangerous because they are a direct link into your cash reserves (as Ms Kyle demonstrated). Secondly, most credit cards nowadays offer "virtual" credit card numbers which can safely be used for online purchases. My debit card doesn't offer that feature.

My wife and I have been using a Citi Diamond Rewards card for several years now. We barely use our checking account other than for the occasional check that has to be written, and to pay off the Citi card.

Anything we can possibly pay with the Citi card - we do. And we've never paid interest yet, it gets paid off each month. We basically treat it like a debit card. And the bonus is, at the end of every year we have $500-600 worth of reward points we use to request gift cards that we give to our kids for Christmas. :-)

Proper use of credit cards is a financial strategy. But if you can't be disciplined with them, and not put more on the card than you have cash in the bank, I recommend staying away.

Guest's picture
Anon

Your 1% or 3% cash back "reward" is not free money. Generally, merchants pay higher fees to the credit card companies when reward CCs are used. These fees are passed on to the consumer as higher prices. We would all be better off if reward cards were converted to simple no-fee cards, and retailers passed on savings to their customers. Unfortunately, CC companies have latched onto reward cards as a very successful marketing gimmick.

Guest's picture
Dave M

That's not true 'Anon'. My wife and I have recently owned and run two different businesses that accepted credit cards. Between the two, we've had at least 3 different merchant accounts. All of them carried a flat percentage per transaction regardless of what type of card someone would use. I challenge you to find me a merchant agreement that says you'll pay a higher fee (as a merchant) if someone uses a reward card.

Incidentally, I'm not disputing that the merchant processing fees help to pay the rewards, but those fees aren't higher for the merchant just because I use a reward card. The rewards are also paid out of interest expenses, late charges and annual fees paid by card holders. Believe me, the card issuers aren't doing too shabby, and can easily afford to pay the rewards. Especially since, statistically, very few people actually claim them.

Guest's picture
Anon

@ Dave # 11 --

Challenge accepted:

Costco CC processing service charges merchants more for reward cards than non reward cards.

Also - I googled "credit card processing rates" and found a number of sites that described the different CC processing rate tiers used by CC companies. Enough to convince me (YMMV) that maybe not all banks charged the differential fees, but some do.

Guest's picture
Dave M

You're right 'Anon', I stand corrected. I looked up the Costco agreement, and sure enough - they charge more for reward cards. I guess some merchant processors are doing it, but I'd obviously avoid those. Just as I avoid gas stations that charge one price for cash, and a higher price for credit cards. :-)

Guest's picture
Anon

Interesting comment on gas stations. I have the exact opposite perspective. In my home town (San Francisco) I seek out gas stations that give discounts for cash - they usually have the cheapest prices - and the differential beats any CC cash back. Gas is the only purchase that I choose to pay cash for instead of cc. I reckon that strategy saves me hundreds of dollars a year.

Guest's picture
Dune

I posted a video comparison analysis about debit card, credit card and charge card at http://credit-card-videos.blogspot.com/2008/12/credit-card-vs-debit-card...

Guest's picture
Bill Dunn

I use my Debit Card almost entirely, but I almost immediately mark the transaction into my checkbook and keep the receipts in my wallet in order to do so. I balance my checkbook and then balance that against my Money account which is balanced against my bank account. The only time I ran into problems was online when I changed my mind immediately after signing up at a Google Success site. It turns out that the people signed me up anyway and then started taking out more. After playing refund pingpong, I finally went to my bank and they just reissued my card. I did not know how dependent I have become on it, from Gasoline to grocery shopping etc...But, the times I have run into trouble have been when I have lost a receipt or not recorded a transaction which have been seldom now that I am no longer working 2 jobs.

Guest's picture
David

We also use a rewards card exclusively for as many purchases as we can. We pay it off twice a month and never carry a balance.

Like Ms. Kyle, I would not want to have my active funds that go towards bills and expenses at risk and tied up in processing disputes. Sure, Visa may refund money that was fraudulently charged but do they reimburse you for the overdraft fees if someone was to go to town with your card after your account was spent? With a credit card, your cash is not at risk.

Also, I found that keeping a minimum balance in my checking account at all times eliminates any overdraft risk. When I was in college, it was $50. Now I try to always have at least $100 minimum.

Guest's picture
steve

re: keeping a minimum in my checking account,

these days the minimum I keep in there is around $1000. At other times it has been lower, but I found that any time I had less than $500 in my checking account, things started to get sketchy and I had to worry about timing deposits and payments.

Along with budgeting my last month's income (already deposited) for this month's spending, this means I will have around $2500, or one month's income (yeah i know I don't have a lot of income) plus $1000 in my checking account at the peak time of the month (near the first), and it rarely drops below $1000 at any time during a month.

Not only is there no risk for overdrafts doing this, I only have to go to the bank once a month to deposit all of my checks for the month and withdraw any cash I need for the coming month. It's almost like not having to think about banking.

Guest's picture
Dave M

The problem I see with seeking out discounts for cash is that very few places are offering them. And stopping the use of my rewards card isn't going to change anything. Millions of other people are still going to use theirs. So why not get a little benefit/reward for spending my hard earned money?

Guest's picture

Have a look at my blog post called Experts Suggest That Credit Cards Are A Better Option For Security Than Debit Cards. In it there are 2 videos of experts discussing the matter of credit skimming as well as several options for protecting your information. One video was from the Today show on NBC and the other was from an episode of On the Money from CNBC, so they are both from reputable sources not some internet junk or propaganda as much of the "info" people like to pass on is..

Guest's picture

Great article!

I submitted it to BankFiesta.com to share with others.

Cheers,

chicagoman

Guest's picture
kitty

Regarding merchant charging more for rewards cards: this may make sense for some store branded cards but it doesn't make any sense at all for Visa/MC bank-issued cards.

The reason it doesn't make sense is that with Visa and Master card cards (both credit cards and debit cards used as credit), Visa and Master Card companies get money from merchant transactions. Rewards, on the other hand, are paid by banks that issued the card. Interest on credit cards as well as all late or other fees is charged by banks. If someone defaults on his or her debt, the bank will lose money, but Visa and Master Card company wouldn't care. So if you have, for example, Chase or Citi Visa card and you use it in a store, the merchant will pay a certain percentage - 2% or 3% to Visa. The rewards, however, are given to you by Chase or Citi. Visa will get its money regardless of whether you use Visa credit card or Visa debit card (used as credit).

Discover and AmEx are different in that they both get money from merchants and are involved in lending. I don't know if they charge merchants more for reward cards. I doubt it as these fees are pretty fixed at 2 or 3%, but I wouldn't bet my considerable life savings on it.

Additionally, since merchants pay a fee if you use a debit card (as credit) as well as credit, merchant fees is hardly the reason to use credit card.

On another subject I don't see this whole "if I use debit card I use real money" as opposed to credit. First of all, anybody who learned to always repay one debt's in childhood should understand that he or she spends real money with credit card too. Second, most credit cards offer "automatic payment in full" option. If you sign up for automatic payment in full, you know that your full balance will be deducted from your bank account on a due date. In this case, the only difference when the money are taken from your account is timing. But with credit cards, the money are deducted later. During this extra float time, your money are in a bank spending money.

I agree with Dave M. For those of us who a) always pay our balances in full b) always think before buying anything, there is no reason at all not to take advantage of rewards and a little extra interest earned while our money are in the bank.